Investment in Gold

We spoke in the earlier articles about investment in Equity and Debt. Let us now look at investment in gold. Gold was never considered as an investment option. Even if it was, the maximum amount recommended has always been 5%. But this has changed in recent years, especially with the price of gold just going up. As we all know that we make a profit if the price goes up, so any investment which increases the net worth of a person is worth investing. This is the reason for gold becoming the favorite of many.
 
Like all the people, even we want to invest in gold, so what do we do? Do I go to the jeweler and purchase gold or go to the bank and purchase gold? There are many options. Seeing the appetite for gold, many mutual funds started exchange traded funds (ETF). This gave the purchaser more flexibility, they could invest lesser amounts as well and the chances of cheating by jewelers (which was always the fear) became a thing of the past. It also increased liquidity.

 As mentioned earlier, gold is not a recommended investment. It is good only when faith is lost in the currency system of the country. It should be used only as a diversification for your portfolio, as gold has never beaten inflation. It is not a hedge against inflation, just like debt. Yes, in recent times it has appreciated quite a bit, but so has inflation. Earlier financial planners used to suggest 5% but seeing the rise in prices, they too have increased their recommendation by another 5%, some enterprising planners might go to 15% but not more.

So now if you have decided to invest in gold, it is better to go for ETF, as it is more convenient, with less risk of burglary. The risk of storage and safety is also taken care of by the mutual fund. There is no fear of the jeweler cheating you and you can sell whenever you require money. Now all you need to purchase ETF is a demat account. Happy Investing.

Inventment in Debt

we read in the last article about investing in Equity, but not all want to take the risk. In such cases debt is a good option. The advantages of investing in debt is principal is safe, return are more or less assured and you do not need to do much research. As it is very well regulated, just like equity. The options available are plenty, which could lead to confusion.  So with so many options what should we look for? Here are some pointers to consider. Check from the tax angle is the interest received taxable? If yes, what would be the tax impact?

As you are aware Interest is taxable under income from other sources. Also when you receive the investment back (if more than a year) it is treated as capital gain. Check if the returns meet your cashflow requirements. As with many options, returns could be monthly, quarterly, half yearly, etc. So check it out and try to get the maximum returns with all the options given above. Though I mentioned that the principle is safe, there is a risk that the company or the bank would go into a bad financial phase, wherein your money could get blocked or even lost.

Some of the most common debt instruments are fixed deposits (bank and company), PPF and government bonds. We should also put debentures into this category, but we need to look at the type of debenture to decide. As some debentures give good returns, we need to look at the credit ratings of such debentures, before investing. All financial advisors would say that some portion of your portfolio should be in debt, this is just to take care of the risk of investing. When you are younger, the proportion of debt in your portfolio can be lower, but as you grow older, this proportion should increase.

This is because your risk taking ability reduces as well as your earning capacity. It there is a fall in the market, usually the impact on debt is low or nil, depending on the debt instruments you have invested in. However remember, debt investment usually does not beat inflation, in fact it is observed that it erodes the value of your investment. While investing it debt look at the lockin period of your investment. Unlike equity, where you can sell and get out of an investment whenever you want. In case of debt usually the period is fixed. Example is, in case of PPF your locking would be 15 years.

As we had mentioned earlier if you invest in debt risks are lower or nil, now a days some new types of investments have come called fixed maturity plans. These are funds promoted my mutual funds, which invest in the debt market. It is observed that usually these funds give a good return, but it is not guaranteed.

Anyways, all said and done, if you are risk averse, debt is the way to go.

Investment in Equity

21000 or 22000 that is the number everyone is talking about, but what is it. It is where all the analyst are saying the Sensex would touch. So if it touches this magic number means it is going up. Yes by the simple logic, if something is at 20000 and reaches 21000, it is going up. So if I invest in the sensex 20000 today and I sell when it reaches 21000, I will make 1000. But I cannot invest in the sensex unless I invest in a sensex mutual fund. I want to invest in equity directly, what should I do?

Do I invest today or wait till it falls more, so that I can make more money. Going by the current environment if I am not careful, I could lose heavily. So if you have not invested in equity earlier, you need to be careful. Most of the time, I have seen, when people invest for the first time in equity, they just invest based on reading in the newspaper, magazine or listening to a friend or relative or now the latest fad TV. It’s better to do your homework. Since this is your first time in equity, you need to tread with caution.

Investing in equity is similar to gambling, but this is more of authorized gambling. You would have a heard of many persons making a fortune in equity Warren Buffet is one of them. But you would have also heard of many of them losing money as well and you would not like to be one of them. Many have made a lot of money in a short span of time, some to longer. You may call it luck, but the one who made the money would call it educated investment and timing. Anyways you have decided that this is the best option, so what do you do?

First of all, you need to open a trading and demat account. You cannot do any investment in the market without a demat account. What do you do next? Instead of what to do next, let’s see what not to do. As it is your first time, do not buy in large quantities, I’m sure you do not want to lose too much money till you start understanding how the market works. Don’t try to do bottom fishing, i.e. trying to enter the market when the price is low. It is never the right time. Even the best of professionals have not been able to time the market.

Do your study and buy a stock which you very strongly feel would do well. Do not go by tips, most of the time tips are leaked by persons who are trying to get out of a particular stock. Last of what not to do, is sell in panic. There would be many times when the whole market falls, whenever the whole market falls, your stock would also fall, so wait for the market to recover. If you have done your study and you are sure of the stock, stick to it, unless your study shows some fundamental change.

Don’t try to enter and exit the market at a fast pace, that is for professional gamblers, whom we all call day traders. This is a whole time activity. All day traders do not consistently make money. There are ups and downs in everything we do. If you invest in equity, do it for the long term. Long term in equity always gives good returns. Studies have shown that the stock market is the only market all over the world which has always grown and its returns are always better than inflation. Some time back I said trading in equity is gambling and as you were reading you agreed, but then why are we still suggesting investing in equity.

As I mentioned if invested properly equity investments can give you good returns, yes you could lose money as well. But equity investment is not for the light hearted, you should be able to take the hit. As it is said, high risk gives high returns. There will be times when you would lose money and you should be able to take that into your stride. The first year will be your learning period. As you start investing and tracking your investments, you will start getting more insights of the complicated market and the number of factors you need to look at.

As I said there will be times you would lose money and sometimes you would make money. But as you start tracking you will learn a lots, let’s give you a start. As we said invest in a stock which you feel strongly about. But what do you look for in that stock. Ensure that the stocks Year on profit is not going down, profits might be good, but also check that there are operating profits as well. Initially go for stocks which are part of the index. These are just some tips. Rest is just study and invest.

Enjoy investing in Equity.

Making the right assumptions

When we start investing for our future we make certain assumptions and then arrive at an amount to be invested to achieve the financial goal. Even if one of the assumptions is wrong, our whole planning would go for a toss. Hence it is very important the we arrive at the right assumptions. What are these assumptions? The assumptions would be

Future costs

How do you arrive at the future costs? Well you are right; first take the current cost into account. Then take into account increase in cost, depending on the number of years into the future you would be looking at. To arrive at increase in cost, we would have to look at inflation rate. Inflation rate is the rate at which the costs are rising, this can be easily got. Depending on the time horizon, it is always better to be conservative. So if you are looking for costs 7 years from now, first find out what was the inflation rate for the past 7 years and take the worst rate i.e. the highest rate.

So even if the inflation rate has not been bad you will be safe, but if the inflation rate increases at anytime beyond what you have assumed, you will have to reassess your future costs take the new costs and inflation rate for the remaining period.  The other part which most of us miss if forex rates. This is for those who have to arrive at future costs in a foreign currency. We should use the same method as we had done earlier for inflation. Find out from the past what was the worst exchange rate and apply it. If the rate goes beyond that, recalculate.

Investment

Once we arrived at the costs, we need to start saving, but how much do we save, is it total future costs divide by the number of months left to arrive? No, as whatever you invest you would be getting a return on it. So you should invest in such a way as you would get the maximum return. This way, you will have to save less or should I say suffer less, since for every extra rupee you have to save, you will have to cut your budget somewhere else. So taking the time horizon, you can decide on the type of investment.

If you have assured rate of return for the investment horizon, your calculation becomes easy. If not you would have to check the past for getting the estimated rate of return and here too, it’s best to be conservative. Another option is go for 2 or 3 different types of investment, this way, you diversify your risks. But this is best when the amount required is high. When you invest you get returns, please do not take absolute returns but post tax returns or else depending on the tax slab you are in, you would end up short to that extend.

Other goals

As you have done the planning for one goal, you also need to plan for your other goal. Else you would have the money but not be able to use it for that goal as some other goal becomes important. So taking the life stages of all members of the family you should do your planning for all the goals. Yes, it is a cumbersome exercise, but then it’s worth it. During your planning if you think, that you have to cut too many corners, have a relook at your goals and see if you really need those goals or some of those can be skipped.

Yes, some of the goals can be skipped; it might not be worth having a goal of visiting USA for which you have to like a paupers life for next 10 years.

Future Income

We made our plans and arrived at a figure to be invested every month to be invested, but for that you should have the money in hand. So while planning, take into account your future sources of income and expenses. What would happen if you do not get the expected rise in salary and to add to it cost would keep going up because of inflation? So take into account the expected net saving in the coming years after considering potential income and rising expenditure.

Plan for Uncertainties

We always keep saying wish I had planned my finances better. If I had done X, then I would be in a better position.

It’s never too late. Start now. What are our basic worries? Tomorrow if something happens how would I be able to take care of myself and my family. What would happen lose my job, fall sick etc. or all of them? Yes all of this can happen to all of us. But then we spend time brooding, than doing something about it. Let’s get to the basics.

What would happen if I did not have a job? How would I survive till I get a job? This is where you need to plan. Have we planned for such emergency? Looking at the current economic scenario, anything could happen, so we need to plan. So what should we plan for 1^st? To be carefree or tension free, first thing we need to do is set aside a contingency fund.

What is a contingency fund? This fund is an emergency fund, to be used in case of emergency or any untoward incident. Now this amount would depend on what you feel would be the time required to get back to normal. If you feel you could get back to normal in a months time then one months expenses should be kept aside as contingency or emergency fund.

Mind you, this is an emergency, so do not touch it unless it is an emergency. This should get you relaxed a bit. Right?

Where should you park this fund, usually you would need it in an emergency i.e. you should be able to have it ready when needed. So most of the financial planners suggest having it in a bank FD, so that it can be broken when needed.

So you think you are done and have become stress free? No, right. Another uncertainty we need to take care of is sickness. This can happen anytime and to anyone. This is a big energy as well as money sapper. Other than expenses, there is also a loss of income, as you will not be able to work during that time. So you should have a medical insurance to take care of this.

Let us look only at essential insurance currently, you could also go for a term policy, this is in case something happens to you, your family would be taken care of. If you have a home loan, then a Home loan protection plan would also help.

Don’t look at insurance as an investment for return, insurance is for contingencies and should be treated as such only.

Inflation indexed bonds

We have been hearing that Reserve bank of India is planning to come out with Inflation indexed bonds. The belief is this will save our investment from being lost because of inflation as the return on investment would be based on the inflation. Internationally this is how it works. You put an amount in an inflation indexed bond at 5% for 10 years. Every year you will get 5% of the interest.

So how is it different from normal fixed deposit? In Inflation indexed bonds the amount invested would change based on the inflation. The adjustment of principle amount would take place on a predetermined date. So if on the predetermined date if the inflation rises by 10%, the principle will rise by 10% and the next interest of 5% would be paid on the new calculated principle. So at the end if inflation goes up, you earn or else you lose.

So we said so many things about inflation and said if it goes up you get more and it goes down you will get less, but which inflation index would be used. Based on the latest information RBI plans to use Wholesale price index, which does not take into account services.

 

So what should we do invest, it all depends on the rate of interest and how inflation is moving. It looks like inflation is coming down, but we need to take a long term view. In the short term it seems to be coming down. Which way would inflation be moving in the long run....Keep guessing.

SIP your way to Financial Health

All of us want to become rich or should we say richer. Whatever we say, we need to grow, be it business, job or money. But sometimes it remains stagnant and the last few years were such a period for the financial markets. Inflation has been going up but the markets have not been giving us returns. So it was the small investors like us who were losing. I know those who had invested in the stock market have just been waiting to get out of the market.

There are some who have redeemed their investments at a loss and the same persons have started investing again as they see the market going up. This pattern of investment does not make money for us, we only lose. But what about those who had invested through Systematic Investment Plan (SIP), they have a different story to tell, they have actually made money. Surprised! Well don’t be, they actually did earn pretty well.

Though many of us know that we can money through SIP, we are very short sighted and start calculating returns with just a few months of investment. We have long term goals but we are short sighted when it comes to investment. The moment we see the market going down we stop our SIP’s, which is wrong. In fact we should continue and you would get units / shares cheap and help in averaging our investment costs.

In fact when the markets pick up, the value of your investment just goes up. SIP of course is not the best way of investing, but it helps in inculcating investment discipline and takes away emotions away from investments. Getting emotional is not good for investment, but intelligent investment is good. In the way we go about we do not have the time to do research and do intelligent investment. Hence discipline in investment is the next best bet.

Starting a SIP is not difficult, in fact every mutual fund has this option, even banks have this option for investing in shares as well. If you plan to invest through SIP in Shares, your research should be good. If not mutual funds are your best bet. Having said all this, we should review the SIP which we have started at regular intervals to ensure that it is giving us the returns we were looking for. I would say reviewing whether to continue or not in a particular SIP should be done once a year.

If after a year you feel that the SIP is not giving you the return you were looking for and find that there is another scheme which would meet your needs, switch. So all the best and SIP your way to financial growth.